John, the CEO of Azul, talked to me in the morning. We closed at that moment, our partnership, so we can capture our friends, colleagues, citizens of submitting planes to the region where we can land, taking to the first responders as well to help them. We have an internal resource allocation in the bank. So donate, there is the pairing of donations. This is a problem that hopefully will be ending soon. Even though it’s long term, there is a rebuilding work. But, you know, I have to start by expressing my deep set, the most solidarity to the population that we can. We’re going to take two steps ahead to do whatever we can, Renato message very important. So let, First of all, I think that we have a toolwork of risk management that is very much developed all throughout many years.
This is a core system in our culture. Risk management is very strong at capital allocation, our institution. So when we do projections of the guidance and projects, we can, with a predictability degree that is very accurate, project our numbers. And we can see that we are developing all throughout the years, both in finance and also risk. And this tool box allows us to do great decisions with a prospective vision and not the short term vision. Of course, we have teams that are high quality. I cannot delegate this to the models, because the models were built by high quality teams, people that are dedicated to understand the journey of the client. And we’ve recently been planting in a very structured way, with the. With the retail, the management of the portfolio.
We have to prioritize and make decisions, and you have to make choices. So, as important as it is growing, you have to choose your battles from the capital allocation standpoint, with a long term view. We saw that there is an over offering of credit over the years. We cut it in the materials that are presented. But there is a series of December, from 22 to March of 24. If you see that series, we didn’t grow R$17 billion, realizing the portfolio. Maybe this is a good number. So you can keep in mind, why? Because these are clients with a compromise of their income very high, their indebtedness, they’re now resilient on the long term and we have to remember that number. So we have, yes, periods of high volatility. So I cannot look at a short cycle and make decision looking at the next three or six months or aiming for the results of the next quarter.
If the VPL of the client is negative and not in the credit overview, we look at the overview client, not the credit overview. So in an institution such as ours that we want to bring and build a strong franchise of great engagement of the clients, having a management of the client and looking at that client on a longer cycle is fundamental. So we can take the make the decisions. So we realize a certain increase of delinquency with everything that we lived after the pandemic, the increase of the inflation, increase of the interest rates, and we knew at that time to make the adjustments that are necessary for the portfolio. I believe that looking from now looking to the numbers that I’ve just commented, we made decisions that are very accurate.
Why? Because management through equity and growing portfolio and growing revenue is not difficult on the short term. The revenue will come. I mean, for growing the portfolio, just have to open the credit filters. You’re going to grow the portfolio, but thereafter, the problem is that you’re going to spend many years paying for that bill. And that’s not how we want to manage the bank. We want a branch, not just looking at it. Naturally there is an issue of value proposition where we’ve done adjustments that are very relevant. It wasn’t a credit card portfolio. There was an over offering of the portfolio of the product on the market. The client had 1.4 credit cards per CPF number. Now we see four credit cards per CPF. We have an over offering over product without annual fees that you can hire digitally and no client.
When they hire a credit card, they ask the interest rate of the installments and the payments. They just think that this is a payment method.[Technical difficulty] [Audio Gap]
Operator: [Audio Gap]
Unidentified Analyst: Client and AI given some of that de-risking of the portfolio. But when you think about growth from here and some of the competitive dynamics that are happening, you have some people competing on the lower income segment, but others talking about growing more with higher income clients. So I mean, how comfortable are you in your ability to maybe accelerate loan growth from here, to be able to deliver on the guidance for the full year? Just, and just digging in a little bit on the loan growth in particular, right. I mean, credit cards are, we, we did see a pickup in personal loans. Just to understand a little bit that the dynamics there. If you go through the loan growth by the individual client segments, like where you see the opportunities and where there still may be some competitive pressures. Thanks.
Milton Filho: Okay, Chitu, thank you much, very much for your question. I start saying that we see a lot of opportunities looking forward. So we are very positive about the size of the opportunity that we have in terms of growing the portfolio. Of course, we had to deal with this de-risking process for the past, I would say two years. And we are very happy we’ve been through that, delivering a very good level of profitability. But we are, yes, working in all segments and we see opportunities throughout all the publics that we have inside the bank, from Italy to the individuals on the wholesale side, we’ve been able to deliver two digits growth. But you have to remember and take in mind in consideration that the debt capital market markets very strong, especially in this first quarter.
So you have to add at the end of the day, we are serving our client not only with the balance sheet, but also with the debt capital market. With for the client is a financing solutions and very important. And we open room to support the clients that don’t have access to the debt capital market. When we look to the SME’s, we’ve been able to post a very decent growth many years in a row. So if you go back, we’ve been growing for many years now and we’ve been growing two digits this year as well. And we still see opportunity to keep growing. This portfolio where we made the most relevant adjustment was on the individual side. I just mentioned a few reasons why, but we see that we are at the end of the tunnel. So we won’t see that pressure coming from this de-risking from the next two quarters.
We just have just a little bit more negative pressure. But in the other hand, we’ve been growing two digits in the target clients that we define. So mid-income, high income, we are growing two digits in all those segments. And we believe that with this platform, this app fully integrated with a full bank experience, we will be able to grow not only in the mid and high income clients, but also in the low income clients. You have to define very clear what type of public you can access, with what type of product, in which channel and what is your expectation in expected loss you can have with this client. So you can define the lifetime value, the VPN of this relation, but taking in consideration of course the risk models that, that we run inside the bank.
So we do believe we have more than a winning class outside the bank, more than a one personality outside the bank. And we do have in the low income, a lot of opportunity, having the correct value proposition. And this is our main goal for this year, to find out the value proposition with the app completely integrated, and we will be able to grow the relationship with low income, mid and high income clients with this strategy. And also we have, of course, all the retail operation running very well, growing the business, the client base of all those segments is growing almost two digits a year. So, just to give you an idea that we’ve been able to grow personality, unique class, not only growing the size and the number of clients, but also growing the shut off wallet of those clients.
So we still have a lot of room to increase the relationship with clients that are already very good clients of the bank. So we don’t see any limitation, of course, in terms of growing. We do see of course, that we have to keep in mind the scenario and how we will manage the scenario, depending on the variables that we see looking forward. So we have to look to the unemployment rate, we have to look to the GDP, we have to look to the geographic, to the demographic of our clients, we have to understand the level of leverage the clients have. So despite of all these tools that we use for risk management, we are very confident that we can grow the portfolio. You will see us growing in the coming quarters and we are very confident with the guidance that we made.
So there is no need to change. If you look Brazil, only Brazil, we are growing 6.6% year-on-year. Then you have LATAM, which is having a major impact, a negative 12%. And why is that? Because the portfolio without this effects variation the valuation, we would be having a 2.6 portfolio year-on-year. This is what we see nowadays, 2.62.8, depending on the way you cut it. So at the end of the day, my most relevant information here, yes, we’ll be able to deliver the guidance and you have to look to us with two other optics. One of that is that if you take out Argentina of our numbers, we are growing at 9.4 top-line. So the financial margins with client is growing 9.4%, which is very, very relevant. But then you look to our cost of credit is diminishing on a nominal basis.
So our financial margin net is very positive. So we are growing the portfolio, growing the financial margin with client and reducing the cost of credit on a nominal basis. So, and also we’ve been able to deliver a very good efficiency ratio. So this is the way we’ve been managing the balance sheet and we believe that we can keep delivering the level of profitability that we’ve been delivering, looking to our longer period. So we are very confident and very positive about the opportunity, of course, always having a huge discipline in capital allocation, huge discipline in risk assessment. So this is our mantra, and we’ll keep that very strongly.
Unidentified Analyst: Great, thanks.
Operator: The next question is you from New York, coming from Jorge Kuri for Morgan Stanley. Hey, Jorge, good to see you. Thanks so much for joining the call.
Jorge Kuri: Hi, everyone. Thanks for taking my question and congrats on the numbers. I wanted to maybe shift to expenses where you’ve done a really good job, certainly well ahead of what your incumbent peers have done. As you think about the banking system moving more and more to the digital front, and some of your better digital competitors now moving into bigger products like payroll loans, for example, how can you compete effectively with players that have cost income ratios, efficiency ratios of 20%, 25%, and are using that to translate into much lower prices for consumers? And I’m asking this in the context of your guidance for expenses. Growing expenses with inflation is just not going to get you there because your revenues are going to grow a little bit above inflation.
They’re not going to grow five times inflation. Your NII, for example, is growing two times inflation. And so the efficiency seems to be lagging where I think financial institutions are going to have to be in order to compete with the pure digital players. So when can you do that? When can you start to provide us guidance of expenses are going to be down 5% next year, down 10% next year, and within the next x number of years, we should be at sub 30% efficiency ratio. Or maybe I’m wrong and you disagree and you don’t think that you need to run the bank at 20% plus 20%, 30% efficiency ratio to be competitive. So just wanted to get your overall take on this. Thank you.
Milton Filho: Start talking about that and give you a few messages. Thank you. Good to see you, Jorge, again. And thank you for the compliments. Let me start saying that, of course, efficiency, for us, it’s key. And that’s why we’ve been delivering quarter on quarter a reduction in our efficiency ratio. We’ve been delivering this quarter the best ratio that we had so far, far. And we keep very positive about all the actions we are taking inside the bank. Our business model is a little different. We are not a full digital bank, and we have to understand that is in this index. We are looking the whole bank. Okay, so this is a full bank index. We come from wholesale global markets, Latin you have Brazil, you have everything. So you have the two index right there, the consolidated index, and also you have the Brazilian ratio.
My message to you is, first of all, we’ve been investing a lot in the digital transformation. That was the first best decision we had to make to be able to deliver a digital experience to our clients with a completely different user experience, completely different efficiency ratio. At this point, we believe that the app, the way we’re going to be integrating that will be a huge achievement in terms of providing a much cheaper cost to our clients, to be able to deliver a much better price at the end of the day and to be more competitive and have a more operational scale coming from technology. So this is something that we’re going to be very, very, very focused. The second thing, you have to look to our model, physical model, but the same way you don’t have the same level of costs, but you don’t have, when you look to the digital banks, the same level of revenues.
When we look, the capability that we have to have a full bank relationship with those clients and creating engagement not only for the day by day products, which always the case, but also to more sophisticated product. You really need this remote application approach to access your clients, to offer, to be consulted to your clients. We are not, I would say, happy because we believe that we still have a lot of work to do in that front. So I’m not saying that we got there and we are happy that we don’t have anything else to do. Yes, we have to keep pushing that and we have to find a way to serve our clients the way he wants, but with a much lower efficiency ratio. Of course, we do have asymmetries in this discussion. So we talk a lot about asymmetries.
